Will the ECB correctly review the disaster in the banks’ balances and assets that Mario Draghi helped to cause?

Sir you write that “a great deal hangs on the drily named ‘asset quality review’ that the European Central Bank is undertaking of the banks it will soon supervise.” “ECB review must have sharp teeth” October 24. We already know what they will find:

First, very dangerous excessive exposures to what banks are allowed to hold against very little capital, because the assets are perceived as absolutely safe, “The Infallible”;

Second, dangerous remnants of exposures to what was ex ante were perceived as very safe and could therefore be held against very little capital, but that ex post turned out to be very risky, among others because of an excessive access to bank credit, “The Ex-Infallible”

And third, they will find an almost total absence of assets of those which require banks to hold more capital, like loans to “The Risky”, medium and small businesses, entrepreneurs and start-ups, something which is extremely dangerous to the real economy.

But will the review state so? You write: “The ECB needs to be conservative. Mario Draghi, a central banker renowned for his political nous, will be all too aware that this exercise is a test not just of bank balance sheets, but also of his own institution’s credentials.”

But Mario Draghi was also for many years the chair of the Financial Stability Board, and is therefore much to blame for the very wrong incentives given to the banks, namely that these could earn much much higher risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky. 

So do you really think the review will state the truth? Which would of course imply that the ECB’s boss credentials are not that good? Or will the ECB try to leave us in our blissful ignorance.

PS. By the way, in your opinion, is a European bank that has 50% of its assets in US Treasury and 50% in German public debt, a good bank?

We need more trigger happy bank regulators

Sir, I refer to John Kay’s “To secure stability, treat finance and fast food alike” in which he writes “Perhaps the most fundamental confusion in the evolution of financial services regulation is the equation of financial stability with the survival of established institutions.”

He is absolutely correct. In May 2003, days when Basel II was being discussed, as an Executive Director of the World Bank, addressing a workshop with some hundred bank regulators, I told those present:

“If the path to development is littered with bankruptcies, losses, tears, and tragedies, all framed within the human seesaw of one little step forward, and 0.99 steps back, why do we insist so much on excluding banking systems from capitalizing on the Darwinian benefits to be expected?

There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

And knowing that “the larger they are, the harder they fall” if I were regulator, I would be thinking about a progressive tax on size. But, then again, I am not a regulator, I am just a developer.”

But they were too much in love in their own risk-management capabilities to listen to someone who was not even a PhD.

The quote is extracted from my Voice and Noise of 2006.

Would US Treasuries been safer, had there been no debt-roof discussions, just business as usual?

Sir, John Plender holds that as a consequence of the “debt-ceiling imbroglio”, and the recent partial closure of US government, “that anyone who can diversify out of US Treasuries will now feel impelled do so as far as possible.” “Treasuries have turned anything but risk-free”, October 23.

If Plender implies that had only the US just gone on lifting the debt-roof of which it has to jump off, sooner or later, and kept on spending as usual, while there is no tapering of the QE, and all without even a discussion, that then the US treasuries would be safer, I do not agree. That is not what “a responsible custodian for more than 60 per cent of the world’s official reserves” should do.

But that there are reasons to diversify, on that there is little doubt. The doubts are with respect to, diversify into what? Though Plender mentions China’s rising to challenge US hegemony, I do not think he is seriously thinking about putting his savings in Chinese banks. Could Plender have gold in mind?

Some disagreements with Professor Persaud´s excellent comments on bank bail-ins and contingent convertible notes, Cocos.

Sir, Avinash Persaud deserves much praise for the clarity of his “Bank bail-ins are no better than fool´s gold” October 22. I do hope the regulators take notice and try sincerely to understand it, though I have many reasons to doubt they will. In the mutual admiration club of the Basel Committee and the Financial Stability Board, they only listen to the members.

That said there are though three issues on which I differ much with Professor Persaud.

The first is when he states “Financial crises are the result of market failure”. This is not always so. The current crisis was produced by regulatory failures present in the loony capital requirements for banks based on, ex ante, perceived risk. These made banks go, excessively, with very little capital, into areas deemed as “absolutely safe” and which we all know, or should know, are precisely those areas capable of creating big financial crises, when, as always happens, some of the perceptions turn out to be wrong, ex post.

The second is when he writes about “the failed philosophy at the heart of the 2004 Basel II global banking rules, which made the market pricing of risk the frontline defence against financial crises.” Where on earth does he get that from? The frontline of Basel II, its only pillar, were the capital requirements I just mentioned… and its implied frontline defence was allowing banks to earn much much higher risk-adjusted returns on their equity on assets deemed as “infallible” than on assets deemed as “risky”. And that is why banks now are not financing the future but only refinancing the past.

The third is when, with respect to Basel II, he mentions “a throwback” and which seems to imply he believes that Basel III is fundamentally different. That is not the case. Where it really matters, on the margins of banks' credit allocation decisions, regulatory risk-weighting is still in full force… and so the distortions of the real economy will keep on occurring… and keep on producing larger and larger crises… to be paid by all, especially by the young.

The debt-ceiling is just as much the debt-roof from which the US will need to climb down from.

Sir, Sir Samuel Brittan should really be commended for reminding us of what is also at stake when stating “The recent fiscal policy deadlocks we have seen in Washington are a price worth paying for proper checks and balances”, “A moderate outlook with the chance of a new crisis” October 18.

In many languages there is just one word for the ceiling and the roof, in Spanish “techo”. And that is why it might be so difficult to translate the nuances of a debate about the goodies of increasing a debt-ceiling, which is able to leave so much aside of the badies of raising a debt-roof, that from which the US, someday, sooner or later, will need to come down from.

And Edward Luce, in “It is stupid to believe that the Tea Party has no brain”, October 21 asks: “Can there be anything more idiotic than flirting with a voluntary sovereign default?” As a Latin American I would have to answer “Yes!” to that. And that would be flirting with an involuntary sovereign default.

Before sending watchdogs into the shadows, should we not get better ones for banks in the light?

Sir I refer to Sam Fleming and Patrick Jenkins reporting Paul Tucker saying “it would be ‘absolutely disastrous’ if the economic fragility of banks was recreated outside the mainstream banking sector”, “Watchdogs urged to look in the shadows”, October 18.

I do not agree. What we should really be scared of are for our truly bad watchdogs now also going for the shadows, after having messed up so much the banks in the light. Just as an example, in the shadows, no one would even dream of leveraging 30 to 50 times, like supervised banks were allowed to do, and did.

Sir, let me ask you one question, please!

If you were a regulator, what would you think poses the greatest dangers for us with the banks, the possibility of their excessive exposure to something rated AAA to AA and which then, ex post, turns out to be risky, or their “excessive” exposure to something rated below BB- ad which would, ex post, turns out to be even more risky than that?

I dare venture you would answer the first, since you would know there would be very few or no "excessive exposures" at all to anything rated BB-. And, if so, the banks would have collected a lot of risk premiums too... which is also capital (equity).

But the risk-weights of our current watchdogs are 20% for the first and 150% for the latter, meaning banks need, according to Basel II, only to hold 1.6% in capital against the first but 12% against the latter, which means banks are allowed to leverage 62.5 to 1 with AAA to AAs but only 8 to 1 with something rated below BB-. Explain that!

You see, the Basel Committee's risk weights measure the risks for the banks of their assets and borrowers, but not the bank risks for us. You see, our and bank regulators’ problems with banks, have absolutely nothing to do with banks and bankers getting it right, and absolutely all to do with banks and bankers getting it wrong!

Before sending watchdogs into the shadows, should we not get better ones for banks in the light?

Wolf, when spinning the US debt ceiling in favor of the spender, do not forget there is also a roof to get off.

Sir, Martin Wolf might be entirely correct when describing some of the possible horrible consequences of the US debt ceiling not being increased, but he is sure spinning the issue entirely in favor of the spender, “The debt-ceiling doomsday device” October 16.

I find the US Congress having to approve a debt ceiling, which is the same as a debt-roof from which the US has to get off from, sooner or later, to be something perfectly valid. When spending bills are presented, these are not “whatever it takes” spending bills, but spending which assumes some type of income. And, for the case those income assumptions are not met then any congress, as any corporate board, should have all the right to say… “Great! But as long as you do not take on more debt than x”.

And what would the markets be saying if all been smooth sailing for the US executive branch to take on any debt it wanted… would that not spook these even more?

PS. As for me, as Martin Wolf knows well, I am much more concerned with the shutdown of access to bank credit for the "risky" real economy, which regulators ordered with their dumb capital requirements for banks based on perceived risk.

Mr. Osborne will receive little help from banks with the real economy, thanks to current bank regulators

Sir, Janan Ganesh, in “Britain’s journey from austerity has hardly begun”, October 15, writes that “Cajoling Britain’s animal spirits while shoring up its discipline will test [Osborne’s] dexterity as a national figure”.

Indeed, and he will not find the banks being able to help him out much either, thanks to the regulators. This, because if there is anything that can kill animal spirits so much, are capital requirements for banks which are higher the higher the perception of risk. And, if it is something that can test bank discipline so much, is allowing these to have minimal capital, and be able to earn huge risk-adjusted returns on equity, only on account of something being perceived, ex ante, as “absolutely safe”. What an utterly silly reason… especially when knowing that all major bank crisis have resulted from excessive exposures to what, ex ante, was being perceived as “absolutely safe”

Financial Times, are you communists?

Sir, you end “Chaos in Caracas” mentioning that “Eventually, voters will let the PSUV know what they really think of its economic amateurism”.

Am I to interpret that as Financial Times believing that if only, a country where 97 percent of fabulous export revenues goes straight to the coffers of the State, was run by economic professionals, then everything would be fine and dandy? Are you communists?

Nassim N. Taleb. If you piss against the wind and get wet, that is no "Black Swan". That is only being stupid

Sir, John Authers in “Taleb's pared-back argument carries an unsettling truth”, October 14 refers to “The Black Swan, which explained market’s difficulties in pricing extreme events for which they had no precedent”. Those arguments, “extreme events” and “no precedent” have provided the perfect cover for failed bank regulators to hide behind.

Just knowing that all bank crises in history have been caused by excessive exposures to what has ex ante been perceived as absolutely safe, but that ex post turned out to be risky, should have made it clear to regulators that playing around with distortive capital requirements for banks, based on ex ante perceived risk… had to doom the banks to excessive exposures to something erroneously perceived as absolutely safe, all aggravated by the fact that banks then would now hold especially little capital.

Of course Taleb is right in arguing that “natural systems work by allowing things that do not work to break”, but, sincerely you do not have to be a renowned scientist or expert to know that. For instance, little unknown me, told bank regulators working on Basel II in a work shop at the World Bank in May 2003: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the other of all bank crises.”

Authers also interprets Taleb writing “Governments should have a risk manager’s mindset, and not try to prod the economy growing. Without a risk-averse mindset, risks will grow”. I am not sure that is what Taleb means, but if so, he is wrong. Currently the biggest risk is the excessive risk-averse mindset of governments and regulators which make them distort so much of the natural systems, and for instance cause our banks to be refinancing the past instead of financing the future.

“The western economy is over-centralized and that creates extra risk”. Absolutely and that is why in November 1999 I wrote in an Op Ed “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse”.

 PS. Not the first time I’ve written to FT on this: Here and Here

PS. I am not a regulator but once, way back, 1966, I was a sailor… though not a drunk one… at least not too much… and so I do know something of what I am talking about.

Ms Bolivia...where during four months I learned not to piss against the wind... 1966... 16 years old.

There can be no economic growth when banks do not finance the future but only refinance the past

Sir, Lawrence Summers in “The battle over the budget is the wrong fight” October 14 writes that “If even half the energy that has been devoted over the past five years to “budget deals” were devoted instead to “growth strategies” we could enjoy sounder economic finances”.

And, on the bottom of the page, Wolfgang Münchau in “Blame Europe’s policy makers for lost ground” writes that “If the eurozone had fixed the banking system as US did, it would now be on its way back to its pre-crisis growth.

The US has not fixed its banking system, it is only that Basel II bank regulations were not as completely implemented in the US as in Europe, and that the US banks are less important to the US economy than what the European banks are to Europe. 

Again, FT, for the umpteenth time, risk-weighted capital requirements for banks stops banks from financing the future and makes them only refinance the past. And, for God’s sake, how can you achieve sturdy and not just obese economic growth that way?

Unfortunately our bank regulators in the Basel Committee and the Financial Stability Board, caring so much about the banks and so little about the real economy, seem to be far to even understand that, and so much less able to correct it.

Please we need Basel IV now!

Janet Yellen: Basel II-III risk-weighted capital requirements do not make banks finance the future, only refinance the past

Sir, Robin Harding congratulating Janet Yellen for her appointment to chair the Fed gives her some “unsolicited advice” in “A memo to the world’s most powerful economist”, October 12.

And so would I like to do. But, as Harding says, since Yellen must now be extremely busy receiving millions of unsolicited advices, I have given long thoughts to how I could condense, in a single tweet short phrase, all of my arguments against that horrible and stupid bank regulation mistake which unfortunately survived Basel II and made it into Basel III.

The title of this is what I came up with. Anyone with better ideas… please!

God make us daring!

PS. On this October 12, may I remind you that risk-weighting, is precisely the kind of regulations that stops an America from being discovered.

Current economic growth is not based on risk-taking but on risk-aversion, and therefore creates more fat than muscles

Sir, I refer to your Special Report on the World Economy, October 11.

While bank regulations that make it harder for medium and small businesses, entrepreneurs and start-ups to access bank credit are not eliminated, and regulators stop insisting on that banks shall only lend to the “infallible” sovereign, the housing sector and the AAAristocracy, any economic growth will only be of the type that leads to obesity.

A £1.000.000 house, but no job, and can’t pay the utilities

Martin Wolf warns correctly “Buyers beware of Britain’s absurd property trap” October 11.

Indeed, it would seem that the dream of politicians, government officials and bank regulators is for all us to be able to feel rich, sitting there in our houses. But unfortunately though the way they go about it will make us sit there without a job, and without being able to pay the utility bills.

But the trap is not solely related to houses, but to all assets that are perceived as “absolutely safe”, because those are the assets a bank is allowed to finance with little capital, which means lot of leverage, which means huge risk-adjusted returns on equity.

But Bbank financing to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups… that is of course a NO! NO! NO!

During the IMF and World Bank meetings in Washington this week we hear more and more about the scarcity of safe assets. Of course, it can’t be any other way. If you do not take a risk on risky assets, how on earth are you to produce the safe?

Tony Barber. No! Hercules would want to have nothing to do, with most of the “eurozone´s crisis-fighters”

Sir, Tony Barber holds that “Fixing the eurozone is a labour worthy of Hercules” October 10, and that, “If he were alive today, Hercules would have much sympathy with the eurozone´s crisis-fighters”. I very much doubt it!

First Hercules would now that fixing the eurozone will be the labour not of big time hero stars like him, but of millions of citizens, “The Risky” toiling away in medium and small businesses, and as risk-taking entrepreneurs.

Second, he would have little sympathy with the eurozone´s crisis fighters because in essence these include precisely those who believed themselves to be Hercules and decided they could, with risk-weighted capital requirements, manage the risks for all of the banks in the eurozone… and caused its crisis.

Mario Draghi, for example, as Chairman for many years of the Financial Stability Board, the only herculean lifting he helped doing, was lifting the bank leverages to the sky, for instance by finding it perfectly normal that banks from all over Europe, including little Cyprus, could lend to the Greek government holding only 1.6 percent in capital, in other words leveraging their bank equity 62.5 times to 1.

Instead Hercules would suggest allowing the capital requirements for banks, on exposures to “The Risky”, to be the same, or even slightly less, than on exposures to “The Infallible”.

And this because he would understand that regulators should not react to the same ex ante perceived risks that the banks have already reacted to, with interest rates, size of exposures and other terms.

And this because he would understand that, you cannot afford bank regulations which hinder the risk-taking necessary to win any war. Europe will not survive if European banks, for senseless regulatory reasons, end up holding only sovereign debts, even if all that is German debt.

And what do I mean with “Or even slightly less capital”? Yes because “The Risky” never ever poses any real systemic threat to banks, only the false members of “The Infallible” do that.

Europeans… go and pray in your churches, “God make us daring!” and then throw out those impostors who want you to believe them Hercules.

Why is it so difficult for Martin Wolf to understand the need for rebalancing the access to bank credit?

Sir, Martin Wolf, October 9, writes about “The pain of rebalancing global growth” but, stubbornly, keeps on refusing to even mention the most important rebalancing act that must occur. And I refer to of course the capital requirements for banks which, as these are risk-weighted, produce a completely imbalanced access to bank credit in favor of the “infallible sovereigns”, housing sector and the AAAristocracy; and thereby discriminates against “The Risky”, the medium and small businesses, the entrepreneurs and start-ups

Why can it be so hard for a seemingly so lucid man like Martin Wolf, to understand that “The Risky” are those who most need access to bank credit in competitive terms, for the real economy to thrive?

Wolf also repeats his mantra of criticizing governments for not taking the opportunity of “ultra-low interest rates for a large expansion of investment”. He still does not understand that since those low interest rates do not include the opportunity costs of all the lending to “The Risky” that has not occurred as a result of the regulators favoring the sovereigns, these nominal rates could, in real terms, be the highest ever.

This week Wolf will be doing the rounds in the World Bank and IMF meetings. He could be interested in that, more than 10 years ago, April, 2003, as an Executive Director of the World Bank I formally stated:

"The Basel Committee dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In its drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. The World Bank seems to be the only suitable existing organization to assume such a role." 

Unfortunately neither the World Bank, nor any other similar institution, wanted to listen… not then, not yet.

Banks and regulators managing the same ex ante perceived risks, simultaneously, can only result in chaos and tears

Sir, Ian Cormack writes of “Banks´ deadly blend of complexity and leverage” October 9. And he holds that though many large businesses are very complex “the differentiator for banking is risk… demanding rigorous risk managing and risk reporting”. That is true but that does not even remotely describe the real difficulties, or impossibility, of managing bank risks today.

Banks look at the ex ante perceived risk of assets and adjust to these (in the numerator) by means of interest rates, size of exposures and other ways like hedging or contractual terms. But then come the bank regulators and adjust for basically the same ex ante perceived risk (in the denominator) by means of their risk weighted capital requirements.

That creates all sort of feed-back noises and, of course… the whole system overdoses on ex ante perceived risks, and all result in chaos.

God, make these regulators understand what they are doing!

Too careful is also “carelessly”

Sir, Gideon Rachman writes “It is a standard, self-pitying complaint in Brussels that the crisis in the eurozone was triggered by the collapse of a US investment bank, Lehman Brothers”, “America cannot live so carelessly forever”, October 8.

Yes that is the superficial fact, but the real truth is that what caused both Lehman Brothers, the eurozone and the US to have a financial crisis, were bank regulations coming from the Basel Committee. For instance, on April 28, 2004, the Securities and Exchange Commission, which supervised Lehman Brothers, effectively delegated its role to the Basel Committee.

And by the way, the crisis was not caused by being too careless, on the contrary by being too careful. It was capital requirements for banks which were so much lower for what was perceived as “absolutely safe” than for what was perceived as “risky”, which caused that extraordinary dangerous large level of bank exposures, backed with minimal capital, to AAA rated securities, to banks of Iceland, to real estate in Spain, and to sovereigns like Greece.

How does Italy break out of bank regulations which are slowly but surely shutting down its real economy?

Sir, I refer to Wolfgang Münchau’s “Italy’s chance to realign – or mess things up further” October 7. There Münchau states that, in Italy, “The most urgent task is to fix the banks. Without credit growth, there can be no sustainable recovery. The overindebted and undercapitalized banks have loaded up on Italian government bonds instead of lending to the private sector”.

Unfortunately, as that is a direct result of regulations which require banks to have about 8 percent in capital when lending to the private sector, but allow for zero capital when lending to the public sector, there is very little Italy and Enrico Letta can do about it. That is unless they distance themselves completely from the creators of this stupidity, the members of the Basel Committee and the Financial Stability Board.

Of course the fact that Mario Draghi was one of scientists, who failed in the laboratory, does not make it easier for a country that also depends on the support of the ECB.

What, do I now need to darken my teeth?

How do you know a customer who enters a store in scruffy jeans is actually worth £11.8bn? The answer according to what Nicole Mowbray reports in “Moment of tooth”, October 5, is “their teeth. People with good dentistry are also often the ones with healthy bank balances”.

What? Does this now mean I have to reduce some grades the white in my teeth in order to qualify like Oprah for some discounts and good economic advice?

FT, don’t scare or bullshit us, with that September and October labor data is indispensable for the Fed to know what to do.

Sir, Robin Harding reports that “Experts fear loss of October data could influence tapering policy” October 5. Boy if that is what we depend on for the Federal Reserve to act correctly, we are, as the somewhat vulgar expression goes, most certainly up shit creek without a paddle.

He also quotes an expert saying “It’s like flying blind”. Come on, the Fed is flying truly blind by not knowing what would be the real interest rates on public debt, net of the subsidies implicit in bank regulations which allow banks to lend to the public sector against much less capital than when lending to citizens. Compared to that blindness the labor data would be, also in a somewhat vulgar expression, chicken shit.

That the Fed, not having a clue about what to do, would naturally like to have that data in order to explain itself, well that is a quite different proposition.

FCA, if there are “high interest rules” should there not be “low interest rate rules” too?

Sir, I refer to your “High interest rules”, October 4.

When reading about the laudable efforts of Financial Conduct Authority (FCA) of trying to reign in the excesses of payday lenders, one can also wonder about when the FCA would tackle the other side of the coin; namely the absurd low interest government pays on its debt and which might even be the reason for why many savers might end up having to reach out for moneylenders.

Let us not ignore that besides awful money lenders who could break your kneecaps, there are also awful money borrowers too, even though these use more subtle methods. Like for instance the borrowing public sector, who have the regulators allowing the banks to lend to it holding no capital, while simultaneously requiring the banks to hold about 8 percent in capital when lending to any ordinary citizen.

Current low interest rates on sovereign debt could, in hindsight, be the highest real rates ever.

Sir, Kenneth Rogoff writes that “with hindsight, yes, the UK could have borrowed more –but we do not have hindsight when decisions are taken”, "Britain should not take its credit status for granted” October 3.

The underlying assumption of that is that current interest rates on much public debt, not only in UK, are very low… and that, in future hindsight, might not be true.

The risk weighted capital requirements for banks favor immensely bank lending to the “infallible sovereign” (and the AAAristocracy), in detriment of the access to bank credit of “The Risky”, the medium and small businesses, entrepreneurs and startups.

And so the cost of public debt which is currently not recorded anywhere, are the most certainly monstrous opportunity costs derived from the distortions in the allocation of bank credit this regulation produces. In fact, it is akin to taking the spark-plug out of the real economy. Yes, our economies might be moving, but perhaps that is only because they are going downhill.

If Peter Clarke is right, Keynes would be outraged about capital requirements for banks based on perceived risk.

Sir I do not know enough of economic history, or of Lord Keynes, to know whether Peter Clarke is correct when he says that Keynes “would have recognised the long gradual deterioration in income equality, and its consequences. He would also have been concerned about the redistributive effects of today’s extreme monetary policy. He would have recognised that today’s financial system is ineffective at channelling savings towards long-term productive investment and is configured more towards rent extraction”, “Reach of Keynes’ thinking deserves to be appreciated” October 2.

But, if that is what Keynes would opine, then I can swear he would be as outraged as I am, about the stupid capital requirements for banks based on ex ante perceived risk, and which allow for much higher risk adjusted returns on bank equity when lending to “The Infallible”, like sovereigns, housing and AAAristocracy, than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and the startups.

Martin Wolf has forfeited his right to preach on budgets, public debt limits and the growth of the real economy

Sir, the whole Western World is flirting with self-destruction as a consequence of having accepted capital requirements for banks based on ex ante perceived risk. These only guarantee dangerous excessive bank exposures to “The Infallible”, like sovereigns, housing and the AAAristocracy; and equally dangerously small exposures to “The Risky”, like to medium and small businesses, entrepreneurs and startups.

Much of the problems of the huge public debt overhang in the USA, and in Europe, are a direct consequence of these regulations. 

I have written, and corresponded on many occasions about this with Martin Wolf. But, since he has deemed it fit to ignore the argument of how these capital requirements distort the allocation of bank credit, I at least feel he has forfeited any right to preach on budgets, public debt limits and the growth of the real economy, like he does in “America flirts with self-destruction”, October 2.

I am not that convinced about the health reform in the USA, since I believe it tackles insufficiently the root problem of excessive costs. Even so I would much rather prefer that the actual line drawn in the sand for any budgetary and debt limit agreement, was the total elimination on any discrimination based on perceived risks; something that should in fact already be prohibited because of the Equal Credit Opportunity Act (Regulation B)

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, since he understands it all… at least so he thinks. For instance I believe Wolf does not understand how subsidized sovereign debt is by these regulations and so in fact, the current public debt level, is considerably higher in real terms. Perhaps Wolf could benefit from reading Jens Weidmann's "Stop encouraging banks to load up on state debt" of October 1.

At long last, the truth about the incestuous relation between banks and sovereigns, is coming out of the closet

Sir, at last someone in the highest spheres, Jens Weidmann, the president of the Deutsche Bundesbank, speaks out. In “Stop encouraging banks to load up on state debt” October 1, he dares to admit that the banks’ “Sovereign exposures are privileged by low or zero capital requirements”

What Weidmann now denounces is that viciously incestuous relation I have denounced for more than a decade and which can be described in terms of: “I government allow you banker to lend to me without capital, and I in my turn will guarantee your obligations to the market” 

And as Weidman daringly admits: “This undermines market discipline for governments and reduces their incentive to carry out the necessary reforms” and “banks, which can obtain unlimited cash against sovereign collateral from the central banks, are protected from discipline from investors who provide the funding.”

In this respect let me remind you of my letter to you, published on November 18, 2004, and which said:

“Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits. Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters”

As an Executive Director at the World Bank 2002-04, I also protested loudly against privileging the sovereign, but to no avail.

Over many years I have not seen anyone in the Financial Times even mentioning the issue of how privileging so much the sovereign, and others like the AAAristocracy, completely distorts the allocation of bank credit to the real economy. I must say that speaks quite badly about your journalists, unless of course you want to excuse them by having to push a political agenda.

So will some of them now, again, bash Jens Weidman’s rational arguments for being excessively austere?

Of course, Mr. Weidman seems to just recently be waking up to the problem, and is not yet totally clear about it. For instance when he states “No market participant would judge a French bond to be as risky as the Greek one: the riskiness of each is reflected in their prices” he is probably not aware that he is with that really explaining why the whole idea of setting capital requirements for banks, based on an ex ante perceived risks, as Basel regulations does, is so utterly dumb, and only dooms banks to overdose on perceived risk.

PS. Here is how the EU made Greece pay for EU's insane mistake of assigning Greece a 0% risk weight.

PS. Here is my letter to the Financial Stability Board (FSB) that was officially received. Will it be answered?

In order to survive, the banks need to get their balance sheets real dirty, with real “risk”, not with excesses of “absolutely safes”

Sir, Wolfgang Münchau in “Do not kid yourself that the eurozone is recovering” September 30 writes that “The single largest constraint on the resumption of eurozone growth is the continued failure to clean up the banks”

That in itself is an indication that after more than five years, the “experts” do not yet understand what has been going on. It is not that banks have been building up excessive risks to what is perceived as “risky” like loans to medium and small businesses, entrepreneurs and start ups, but excessive exposures to what is perceived as “absolutely safe” like sovereigns, housing and the AAAristocracy.

If, as Münchau hopes, Mario Draghi, the president of the European Central Bank, is serious in producing a clean and honest quality [bank] asset quality review next month” that would also including the review of what is NOT on the banks balances. Fat chance! Mario Draghi was for years the chairman of the Financial Stability Board.

“The Risky” borrowers, if only they knew, would envy like crazy the banks and “The Infallible”, their Basel Committee lapdog

Sir, Patrick Jenkins, reports “Watchdog to retreat from strict capital rules”. September 30. In it Stefan Ingves, the Swedish central banker who is the head of the Basel Committee on Banking Supervision, is quoted opining that perhaps they should be softening the “tough capital rules on securitisation introduced four years ago”. Why do not the “risky” borrowers have a similar access to a regulatory lapdog?

The more the regulators soften the capital requirements for banks on whatever can be construed as belonging to “The Infallible”, the more will these directly discriminate against those already being discriminated against by banks and markets, on account of being perceived as “risky”, such as medium and small businesses, entrepreneurs and startups.

When the “risky” become “safe”, by means of being bundled up in securities, the profits of lowering the capital requirements for banks, goes almost entirely to the bundler and the banks. Why does not that profit go primarily to those being bundled? 

It just comes to show that the small and “risky” of the real economy, even though they have never ever caused a bank crisis, are just chicken shit in the eyes of regulators who just love to mingle with the AAAristocracy.

If the ordinary citizen, not just “civil society”, is not part of the climate change challenge, we are all toast.

Sir, my first reaction when I read Nicholas Stern’s “World leaders must act faster on climate change” September 30, was “How could they? There are none.

When about a decade ago I was an Executive Director at the World Bank, I often held that since at our board no one spoke for the world at large, and really only parochial interests were represented, we should perhaps in the name of transparency, rename us the World Pieces Bank, or perhaps the World Puzzle Bank.

And I also held and hold that if we allow acting on climate change to become just another rent seeking opportunity, or a political agenda pushing opportunity, we are all toast!

Having had the opportunity of flying over many environmentally affected areas, I really do not need a lot of scientifically studies to know that something is very wrong with how we maintain our planet, or our pied à terre as I like to call it. But what can we do about it?

I have no definitive answers of course, but I do firmly believe that impeding “climate change” to become an issue which belongs solely to an elite, and engaging the full attention of the ordinary citizen, is an absolute must.

For example when reading about the Copenhagen Climate Change Conference of 2009, I got upset about how often it was implied that the solution was the exclusive responsibility of the rich countries, as if the poorest human being, in the poorest of the countries has not exactly the same right, and duty, as an indigenous of the world, to participate in the challenge.

And to stimulate such citizen participation, and by which I mean immensely more than “civil society”, creating a visual aide, such as an environmental Google-map that tracks the climatic and environmental changes, and make it accessible in all schoolrooms around the world, could help.

If the threat to our earth is truly serious, something that I have no real evidence to doubt, it is clear that we cannot leave its solution to politicians, and green rent seekers. If we do so we are toast.

If “Osborne has now been proven wrong on austerity” that does not mean that Martin Wolf would be right

Sir, if “Osborne has now been proven wrong on austerity” as Martin Wolf opines, September 27 it does not mean that Martin Wolf would have been proven right with his lesser austerity.

I say this because Martin Wolf refers to monetary stimulus, and if given while capital requirements for banks based on ex ante perceived risk impedes the liquidity to go where it is most needed and could be most productive, then you will also have an “unnecessarily protracted slump”, perhaps even an everlasting one… until all blows up!

The austerity that is killing off the western world economies, is the risk-taking austerity imposed by bank regulators who seem to ignore that we pray “God make us daring!” in our churches.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

What about bank regulators as scary movie villains?

Sir, Nigel Andrews writes “The spawn of the bankers make the scariest movie villains”, September 27. But since I am much more scared of bank regulators that of bankers I wonder if he could identify some movies were these are presented as villains.

For instance their capital current requirements for banks, based on ex ante perceived risk of their assets, could be likened to traffic allowing cars to speed at different velocities depending on the ex ante perceived value of car safety features, and without considering the driver. Can you imagine what scary disastrous car wreckage scenes could be filmed as a result?

The ECB’s bank asset quality review should also look for what is NOT on the banks’ balances.

Sir, Patrick Jenkins reports on a “Bank review to asses lending exposures”, September 27, and which, in words of Mario Draghi, will take place “to dispel this fog that lies over bank balance sheets”. Let us pray that what they find is not too scary.

That said, what the regulators will not be looking for, primarily because they do not care a shit about the real economy, are all those really productive “risky” bank assets that should have been on bank balances, had these not been scared away by the regulators senseless risk-weighted capital requirements.

How and when will we be able to dispel the fog that lies over the regulators’ eyes?

FT, I just can’t believe you believe we need regulators, like Michel Barnier, to save us from Libor scandals

On September 3 you wrote “Barnier’s revolution”, in which you held that Brussels is right to end self-regulations”, like in the case of setting the Libor benchmarks.

Please read carefully your own reporters “Court papers reveal Libor broker called banks ‘sheep’” September 26, and tell us: Now that the market knows what happened, what good can come from having a regulator, perhaps Mr. Michel Barnier himself, overseeing the setting of Libor?

FT, with respect to ECB and any new LTRO, dare not to withhold the most important advice

Sir, in “ECB’s next steps”, September 27, you write that “Providing cheap loans to the banks is no guarantee that the money will find its way to families and businesses”. Of course not! Banks now suffer a tremendous lack capital, and since lending to “The Risky” requires the most of it, there will be no such lending.

And then you conclude “Putting the stability of Europe’s banking system beyond doubt is arguably more important than a new round of cheap loans”. But No! Hold it there! That’s is exactly what got Europe in trouble in the first place.

Precisely because of searching for bank stability, so fanatically that no consideration was given to how bank credit was allocated in the real economy, the regulators allowed banks to hold much much less capital for whatever exposures were ex ante perceived as “absolutely safe” than for exposures perceived as “risky”. And so, as was doomed to happen, the banks ended up with huge exposures to the absolutely-safe-gone-very-risky, all aggravated by the fact of also having little capital.

Of course “new long term financing operation should not come at the expense of capital” but much much more important than that, is that no new LTRO should be made available, before getting rid of the so distorting risk-weighted bank capital requirements.

And FT, if you are to be true to your motto, “Without fear and without favour”, you should not withhold such recommendations only because one of the responsible for this regulatory stupidity is Mario Draghi, a former chairman of the Financial Stability Board, who now happens to be the president of ECB.

The world is much better off thinking that the risky are less risky than we think them to be, than that the safe are as safe as we think.

Why should banks earn higher risk adjusted returns on equity financing property than when financing businesses?

Sir, John Plender writes “Historically, the biggest single cause of financial crises in the UK has been the bursting of property bubbles” “BoE lacks tools needed to prick property bubble” September 25.

If that is so, which I have no reason to suspect it is not then would he, or Lord Turner, explain to us, why were regulators allowing banks to lend to property against less capital than when doing much other lending? Did that not signify that banks would be earning higher risk adjusted returns on equity on property lending than on other lending? Did that not doom banks, next time a property bubble burst, that everything would be so much worse, since banks would be standing there with especially little capital?

BoE does not lack tools. It just needs to arm itself with a new generation of regulators capable of understanding that risk-taking is not something dirty, even when banks do it. And of understanding that there is nothing as risky as excessive risk-aversion.

No matter what Schäuble-Merkel or Wolf think, Europe will not survive if it does not rid itself of Basel II and III

Sir I refer to Martin Wolf’s “Germany’s strange parallel universe”, September 25.

Bank regulators have based and still base their capital requirements for banks on how borrowers could fail and not, as they should, on how banks could fail, as entities and in allocating credit to the real economy. For instance, instead of observing themselves the credit ratings of any bank borrowers, they should be observing what bankers do when they see those credit ratings.

And so when the Basel Committee regulators introduced risk-weighting into the capital requirements for banks they created huge distortions, which have proven to be not only very dangerous for the safety of the European banks, but which also impedes bank credit to be efficiently allocated in Europe.

And that unpardonable mistake caused the crisis in Europe, and blocks any real European economic recovery, and this no matter what other route Europe takes, be it Schäuble’s and Merkel’s, or one that Martin Wolf could agree with.

Europe go directly to Basel IV!

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

If banks and QE finance sovereigns, housing and AAAristocracy, who is to finance “the risky”? You and me? Widows and orphans?

Sir, I refer to John Authers’ “Side-effects that should call time on the QE medicine” September 23.

The market, as the compass that directs the allocation of financial resources, has been rendered useless by the introduction in its center of two big chunks of iron. The first is capital requirements based on ex ante perceived risk, the other is QE. If these sources of magnetic distortion somehow neutralized each other, for instance QE mirrored the deleveraging of the banks the economy might not head too much out of course. But, unfortunately, they just reinforce each other.

The capital requirements push banks to lend to sovereigns, housing and the AAAristocracy, and QE, buying sovereigns to ease the borrowing rates of government, and help housing, push in the same direction. The question which remains is then who is going to take care of financing the risky. Truth is that if we get out of this storm alive and are able to find safe harbor, we can count ourselves extremely lucky indeed. As is what is most probable is that we end up sitting in million dollar houses, without a job, to help us pay the utility bills.

Banks are not looking to maximize risk-returns on loans, but to maximize equity-returns of loans.

Sir, Martin Feldstein in “Why the Fed is wrong to delay the return to normality”, September 23, writes that by “promising to keep the real short-term rate below zero even the economy has returned to full economy… they distort the investment behavior of individuals and institutions, driving them to reach for higher yields by taking inappropriate risks. They lead banks to make riskier loans in order to get higher returns”

Feldstein is right about individuals and institutions, other than banks. Because, as to the banks, these are not searching for higher returns by making “riskier loans”, but to maximize the return on equity by minimizing the capital they need to hold against the loans. It is all about a flight to perceived regulatory safety

If banks had self-regulated, current extreme high bank leverages would never existed. Basel Committee´s regulations enabled these.

Sir, in “Barnier’s revolution”, September 23, you write that “Brussels is right to end self-regulation” in this case of benchmarks, like the Libor. But we should forget that having other selves regulating, does not guarantee by a long shot better results.

For instance, if the banks had been self-regulating, instead of falling in the hands of the Basel Committee the current financial crisis would not have happened. I say this because there is no imaginable way banks would allow each other to hold capital in accordance to ex ante perceived risks, since they would all have been asking each other… “What if those ex ante perceptions, ex post turn out wrong?”

For instance can you imagine European banks with 30 to 50 times to 1 debt equity ratios, if there had not been a regulator who vouching for these enabled it all?

And in the case such as the Libor, I would still believe that self-regulation which explicitly accepts responsibility is still the best way to go. The quotes of Libor which created the scandal were quotes lower than the real Libor, which implied that the interest rates banks could charge their borrowers were lower than what they should be, and so any bank, sufficiently aware now of what shenanigans were going on, would most certainly raise all hell if that was repeated.

And besides, since some regulators did not mind at all low Libor quotes, since these inspired tranquility, one should also be highly suspicious of what other types of selves can be present in non-self-regulation.

God save us from regulator hubris!

Parade bank regulators down 5th Av, wearing dunce caps, so the next generations of them, know they will be held accountable.

Sir, Mr. William N Kring writes “Banks continuing to sabotage reform”, September 21. Indeed, of course, that’s their business.

But, the number one saboteurs of the much needed reforms are the regulators. By hanging on to their so misguided capital requirements based on ex ante perceived risk, as if their risk perceptions had not previously been seen and cleared for by bankers, they keep creating the regulatory muddiness which allows for the so much muddy lobbying by the banks.

What could banks do if for instance there was just one simple and transparent battle line, like an 8 percent capital requirement on any type of bank assets?

But that would also signify that the whole regulatory establishment would need to confess they were absolutely wrong, from beginning to end, when they with immense hubris thought they could be the risk managers of the world, and started to impose risk-weights, and which only distorted all common sense out of the allocation of bank credit to the real economy.

Damn them, make them parade down 5th Av, wearing dunce caps, so that next generations of bank regulators know they will be held accountable.

Lord Turner, put on a dunce cap, and go and sit in a corner

Sir, Gillian Tett quotes Lord Turner in that a standard economics text book claims that banks exist to “raise deposits from savers and then make loans to borrowers”… and “primarily lend to firms/entrepreneurs to fund investment projects” but that it is a fiction, as he calculates that today in UK a mere 15 percent of total financial flows actually go into investment projects, the rest is to support existing corporate assets, real estate or to “facilitate lifecycle consumption smoothing”, “Debt explosion is the real story behind QE dance”, September 20.

Frankly, what did this former bank regulator would happen when he and his colleagues never concerned themselves one iota with what the purpose of the banks could be; and limited their action to mostly allowing extremely low capital requirements for banks on whatever exposures that, ex ante, could be perceived as “absolutely safe”; something which of course made it so much more difficult for “The Risky”, the medium and small businesses, the entrepreneurs and the start-ups to access bank credit, in competitive terms?

The regulators helped to hook western economies on ever-expanding levels of debt? Yes, indeed, but worse yet, they castrated the banks and introduced a regulatory risk-aversion that is taking the western economies down down down.

As I see it Lord Turner is just one of those regulators who should put on a dunce cap, and go sit in a corner. Is it rude of me? Perhaps but what, except for socially sanctioning such dumb behavior, can an ordinary citizen do?

And, of course, this also goes for many other of Lord Turner's regulating colleagues. Like Mario Draghi and Stefan Ingves for example. A Big "Dunce-Cap" Party!

But, Luke Johnson, how do we get the Basel Committee to understand it has hit regulatory rock bottom?

Sir, the Basel Committee’s bank regulators, by allowing Cypriot and other banks to lend to Greece against only 1.6 percent in capital, which basically means allowing for a 62.5 to 1 debt to equity leverage, helped to cause both Cyprus and Greece to hit bottom.

But, in Luke Johnson’s “How to find some value in hitting rock bottom” September 18, we find no clue about how we could make sure that the Basel Committee understands and acknowledges it has hit regulatory rock bottom?

I mean these comfy regulators do not pay or suffer much direct impact from the damages they produce. In fact, after their Basel II flop they have even been authorized to follow up with a Basel III, using the same script of capital requirements based on ex-ante perceived risk. Hell, neither Hollywood nor Bollywod would allow something so dumb.

If monetary stimulus irrigates swamps and not deserts, it will make all so much worse.

Sir, bank regulators, by allowing banks to hold absolute minimal capital against what was perceived as “absolutely safe”, 1.6 percent or less, effectively injected huge amounts of liquidity in the economy. And precisely because of how these capital requirements were skewed, in favor of “The Infallible” and against “The Risky”, they directed our banks to lend too much, at too low interest rates and in too lenient terms to sovereigns, housing and the AAAristocracy, and too little, at too high rates and in too strict terms to “the medium and small businesses, the entrepreneurs and start-ups.

And with that distortion inflicted on the real economy, they not only created the current crisis but also keep us there. Unfortunately, even though he has assured me that he understands it, Martin Wolf does still not get it. And perhaps that is because this argument might stand in the way of his macroeconomic imbalances explanations. “We still live in Lehman’s shadow” September 18.

And, if now Wolf’s favorite to Fed chairman, Janet Yellen, does not understand that either, and is appointed, and keeps on swamping the swamps and drying the deserts, so help us God.

PS. Sir, jut to remind you again that I am not copying Martin Wolf with this comment. He has asked me not to send him anything more on “distorting bank capital requirements” as he already knows it all… at least so he thinks.

Anat Admati. Forget about 20 to 30 percent of bank equity, it will not happen in our world and in our time.

Sir, of course, most of us would like the banks to have the 20 to 30 percent of equity, for total not risk weighted assets, which Anat Admati recommends. "Higher equity level for banks not such a bitter pill" September 17.

But why do we discuss an impossible? Does Admati not understand how many trillions of Euros in bank equity would have to be raised only in Europe? The sole mention of 20-30 percent scares all new bank equity away.

If a more modest, and I believe also quite reasonable goal of 8 to 10 percent was set, in a credible way, then that goal could perhaps be reached, especially if governments, as they should, since the undercapitalization of the banks is entirely their Basel Committee´s fault, helped along with some special tax incentives to bank equity.

And the above does not even begin to consider the tremendous reallocation of bank assets that would have to take place; since the assets a 30 percent capitalized bank wishes to hold are completely different from what than the current 3 percent capitalized banks have.

But, on the real positive side, let me assure you that just getting rid of the distortions produced by the so foolish ex ante perceived risk-reweighting, would make for much safer banks and would allow these to allocate financial resources much more efficiently in the real economy.

Mr. Bob Diamond. Is not a level playing field for borrowers in the real economy accessing bank credit, even more important?

Sir, Bob Diamond, a banker, holds that “A level [regulatory] playing field… is essential to ensure banks have consistent and predictable financial targets” “‘Too big to fail’ is still a threat to the financial system”, September 16.

But, is not a level playing field for when the actors in the real economy access bank credit even more important? Because, there is no level playing field there as long as bank regulators allow for different capital requirements based on perceived risk.

Currently banks are earning much much higher risk-adjusted returns on equity when lending to “The Infallible”, like to some sovereigns, housing and the AAAristocracy, than when lending to “The Risky”, like to SMEs, entrepreneurs and start-ups.

And that as you of course would understand, but that bankers prefer to conveniently ignore, causes, consistently and predictably, our banks to lend too much, at too low interest rates and in too lenient terms to “The Infallible”, and too little, at too high rates and in too strict terms to “The Risky”. And that is a distortion inflicted on the real economy, and therefore also a threat to the financial system.

A leverage ratio for banks is mostly needed, not to make these safer, but to distort less their credit allocation.

Sir, the prime reason for imposing a leverage ratio on banks is not, as most suggest, to make banks safer, but to stop the distortion that the risk weighted capital requirements for banks produce in the allocation of bank credit in the real economy.

And it is a true shame that this angle is not reviewed by Patrick Jenkins, in “Five bitter pills” September 13, where he settles instead on discussing a 30% leverage ratio, something that will just not happen. In fact, a maximum 2.3 debt to equity ratio for banks, which is what 30% leverage ratio results in, is, in many ways, just as absurd, as the 32.3 debt to equity ratio that a 3% leverage ratio allows.

Questioning Gillian Tett on the seventh and largest uneasy truth about the not cleaned up crisis

Sir, if banks are allowed to hold much less equity against what is perceived as “absolutely safe” than against what is perceived as “risky”, the banks will earn much higher risk adjusted returns on their equity when lending to “The Infallible”, like to some sovereigns, housing and the AAAristocracy, than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and start-up. 

And that as you of course will understand, causes banks to lend too much, at too low interest rates and in too lenient terms to “The Infallible”, and too little, at too high rates and in too strict terms to “The Risky”.

And so here is a question to Ms Gillian Tett. Does she believe those risk weighted capital requirements will lead to stability in the bank sector, or to the correct allocation of bank credit in the real economy?

If she says “Yes”, well then there is little I can do. Perhaps I should not expect more from an anthropologist. But, if she says “No”, then I would have to ask her on why she insists on ignoring this most outrageous “uneasy truth”, like when she describes how the “Insane financial system lives on post-Lehman”, September 13.

I say all this because the fact remains that the outright dangerous and so insane “risk-weighing” of capital requirements, has been, and still is, the fundamental pillar of all the Basel Committee’s bank regulations… and that mostly because that comprises a too uneasy truth for regulators’ egos to handle.

Sir Bank Regulator, excuse my bluntness, is that not really fucking dumb?

Sir, there is a question bank regulators really hate being asked, and it goes like this:

Sir Bank Regulator, you must know that when banks are allowed by you to hold “ultra-safe” assets against much less capital than what is required of them when holding “risky” assets, they do earn much higher risk-adjusted return on equity on the safe assets than what they earn on the risky.

And that of course means that banks will lend too much at too low interests to “The Infallible”, like sovereigns, housing and the AAAristocracy, something which in itself is risky for the banks; and too little, or nothing, at too high interests to “The Risky”, like the medium and small businesses, the entrepreneurs and start-ups, something which is equally risky for the real economy, and for the banks.

And so, Sir Bank Regulator, excuse my bluntness, but is that not really fucking dumb?

And when I have asked regulators what’s above (with only two exceptions and who I do not want to name, because that could make life difficult for them with their colleagues) they all go away, as if I have insulted their intelligence… something which I really don’t have to do, since, as I see it, they are with gusto doing it to themselves.

Sir, and now again it is you Sir of FT. My question on capital requirements for banks based on ex ante perceived risk, only reinforces what Satyajit Das so well concludes in his “Post-crisis policies offer only chronic stagnation” September 12, namely that current “policies will engineer a chronic stagnation, requiring continuous interventions to prevent rapid deterioration”, and this as I would explain, when more safe-havens get to be dangerously populated and more of the risky but potentially valuable bays are left unexplored.

Am I supposed to use this f... language in this context? Perhaps not! Especially so when being a respectable grandfather, but, much more vulgar and harmful to our society, primarily to the possibilities of our young ones of finding sturdy employments in their lifetime, are these regulators.

God make us daring!

Though policymakers cannot decree the balance of the economy, they can surely guarantee its imbalance.

Sir, how economically efficiently the banks allocate credit is going to a very high degree determine the vitality and sturdiness of the real economy.

And current bank regulations, with capital requirements based on perceived risk, by allowing banks to earn much much higher risk-adjusted returns of equity when lending to “The Infallible”, like sovereigns, housing and the AAAristocracy; than when lending to “The Risky”, like the medium and small businesses, the entrepreneurs and start-ups, guarantees an inefficient allocation of bank credit.

Robin Harding, in “Americas economic growth is built on sand” September 11, writes that “Policy makers cannot prescribe the balance of the economy”. That is correct, but policy makers, by allowing for these dumb regulations, with its phony risk aversion, are indeed decreeing the imbalance of the economy. Obviously, Washington is not alone doing that, all Europe is too.

So there are two kinds of entrepreneurs, those with housing collateral to offer banks and those without. Pity the latter... the unemployed... and us

Sir, John Plender in “Britain has embarked on wrong kind of recovery”, September 11, writes, “Since banks require entrepreneurs to back their borrowings with housing collateral the small business sector also needs a rising housing market to prosper and generate jobs”.

So there are two kinds of entrepreneurs, those with housing collateral to offer banks, and those without. Just out of curiosity, why does not John Plender call a banker and ask him, how much capital a bank is required to hold when lending to either one of those entrepreneurs classes. Might much of the bank reluctance to lend to the entrepreneurs without property have to do with that they might then be required to hold much more capital that in the other case?

Do you really want to have bankers who lend to entrepreneurs by looking at their properties and not caring shit about what they will do with the money? Is that how you wish to drive a recovery that creates sturdy jobs?

“A plan to finish fixing the global financial system”, or will it just finish it off?

Sir, in “A plan to finish fixing the global financial system” September 10, if his then quite an arrogant title, Mark Carney, the governor of the Bank of England and the current chairman of the Financial Stability Board writes “supervisors need to make good the pledge to G20 leaders… to tackle large differences in risk weights across banks”. I would ask him the following.

Why do you not tackle the supervisors’ own criteria of allowing large differences in risk weights to determine the effective capital requirement for banks?

Do you not understand that allowing for much much lower capital requirements on exposures to the “Infallible Sovereign”, to houses, or to the AAAristocracy, than for “The Risky”, like the medium and small businesses, entrepreneurs and start-upscauses the banks to be able to earn much much higher risk adjusted returns on equity when lending to the former than when lending to the latter.

Do you not understand that causes serious misallocations of bank credit in the real economy, and is by itself a source of immense systemic risk for the banking system?

Now if Mr. Carney would not understand what I am talking about, then I guess I would humbly have to recommend him taking a Finance 101 refreshment.

Carney also states “The G20s aim is to turn shadow banking from a source of risk to a source of resilience”. If that is going to happen by the Basel Committee and the Financial Stability Board, with excessive hubris continuing to believing themselves to be the risk managers of the world, and thereby distorting the global financial system… then, God help us! That would only finish it off.

And now, in the age of transparency, the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!

Sir, I refer to Steve Johnson’s “Money market ratings ‘outlawed’” of September 9 in your FTfm.

There Johnson writes of a proposal by the European Commission to ban money market funds from soliciting or financing a rating from a credit rating agency” so as “to end the risk of sudden massive redemptions” from a fund in the wake of a rating downgrade, [thereby[] strengthening the financial stability”.

What can we say? Now the European Commission is promoting blissful ignorance. Holy mo! Back to the Dark Ages!

Why do they not just impose a little note after each credit rating stating who paid for it? And let the market take it from there?

Bank regulators, rock stars? We wish, I bet you rock stars would not have messed it up this way!

Sir, Patrick Jenkins, in “Banks adapt to being kept in check” September 9, quotes “one top regulator who is close to Mark Carney, the new governor of the Bank of England” and the current chairman of the Financial Stability Board” saying “Regulators are the rock stars these days”. If so, what a sad class of rock stars we have.

Three of the problem circles in Jenkins’ “nucleus of the banking crisis” are directly related to bad regulations.

“Low capital”, indeed, how could it be otherwise when Basel II authorized banks to hold only 1.6 percent or even zero capital against so many of their assets.

“Bad investments/trading”, indeed, if you as a bank were allowed to leverage your equity 62.5 times to 1, only because something had an AAA rating provided by human fallible credit rating agencies, you were bound to get into trouble.

“Bad lending” indeed, I bet you that none of our real rock stars would have thought it a great idea for banks, like those of Cyprus, to lend to Greece against only 1.6 percent in capital.

And also when Jenkins quotes Douglas Flint, chairman of HSBC saying “It’s the system’s asset concentration – principally in government debt and in mortgage debt – that can be dangerous” he is directly spelling out what should have been the expected results of Basel I, of Basel II and, unfortunately it would seems, of Basel III too.

But the worst consequence of these faulty regulations, by which banks are allowed to earn much higher risk-adjusted returns on their equity when lending to “The Infallible”, than when lending to “The Risky”, does not even appear on the bank’s balance sheets. The worst consequence, in my opinion, is all those many loans to “The Risky”, the medium and small businesses, the entrepreneurs and start-ups, which were denied by the banks, only because of these capital requirements. Those credits, if approved, could have delivered the next generation of sturdy jobs that our young ones so much need.

And so the bank regulators are now the rock stars? Forget it! Truth is that if any modest social sanction existed, and journalists did their jobs, instead of sucking up to the regulators, they would be paraded down the main avenues wearing dunce caps.

Risk-weighted capital requirements are a prime example of quack policies, and FT ignoring it, of quack journalism

Sir, Sir Samuel Brittan writes that “Politics resonate with the sound of quack policies”, September 6.

A prime example of those quack policies, are the risk-weighted capital requirements for banks based on perceived risk, lower-risk less-capital, higher-risk more-capital. These cause the banks to earn much much higher risk-adjusted returns on their equity when lending to “The Infallible”, the AAAristocracy, than when lending to “The Risky”, like the medium and small businesses, entrepreneurs and start-ups. And that of course distorts completely the allocation of bank credit to the real economy. 

Those capital requirements are not “based on evidence”, and do not stand up to scrutiny. As to the empirical evidence, this would point in the opposite direction, as all major bank crises have always resulted from excessive exposures to what is perceived as “absolutely safe”. As for the analysis that lies behind, that is as mumbo-jumboish as you can find.

Brittan holds that such quack policies “overlook the benefits that people derive from the discouraged activities”. Indeed the benefits for the real economy, of the banks providing access to “The Risky”, in competitive terms, are completely overlooked.

Brittan also hold that such quack policies ignore the substitutes that are found and can be as harmful as the original. Indeed, by allowing the banks to earn such high expected returns on equity on what is “absolutely safe”, they might lend it too much on too lenient terms, and so the safe havens can get get to be dangerously overcrowded, like what happened to AAA rated securities in the US, Spanish real estate, Greece and other “infallibles”.

But I must say that for the Financial Times to ignore such regulatory quack, for so long, even when I have written you over one thousand letters about the problem with these regulations, that could also classify as quack journalism.

“Inalienable sovereign rights” is most often just a wonderful exploitable excuse to screw your own citizens

Sir, François Heisbourg writes “It is clear… that the new great powers, including a reinvigorated Russia are deeply averse to interference in what they see as inalienable sovereign rights – an attitude explained in many instances by their former colonial or dependent status”, “The west is accelerating its own strategic decline”, September 5.

I think there is a need for a clarification. 99 percent, at least, of the demand for the respect of inalienable sovereign rights, comes from those wanting to use that as a shelter in order to violate what should be the even much more inalienable human and economic and democratic rights of their citizens.

To oversell the importance of “inalienable sovereign rights” is only to play into the hands of dictatorships, even those who dressed up as popular democracies, are quite often, de facto, nothing but dictatorships.

Current bank regulations can only produce old weak jobs, not new sturdy and strong jobs. That takes risk-taking.

Sir, Chris Bryant, in “Germany’s ‘jobwunder’ obscures full picture” September 3 reports that most job growth in Germany is made by “low paid, precarious types of employment Such as part-time work, temporary contracts, so called ‘minijobs’ and outsourcing”.

We should not be surprised. Bank regulations which allow banks to earn much higher risk-adjusted returns on equity when lending to “The Infallible”, than when lending to “The Risky”, can only produce fatty tissue, and not the muscles required to engineer a new generation of sturdy jobs… that requires risk-taking and does not allow for excessive risk-aversion.

The Financial Stability Board, like the Basel Committee...is to “minimize disruption”? Fat chance!

Sir, you write “the FSB should not shy away from making markets safer. But it should try to minimise disruption along the way”, “Making repos safe: Financial Stability Board seeks shadow banking rules” September 2.

Fat chance, neither the Financial Stability Board, nor the Basel Committee, care one iota about how they distort. Just look at how they so blithely ignore that their capital requirements for banks, which causes to provide the banks with different risk-adjusted returns on equity for different assets, has distorted all common sense out of the allocation of bank credit in the real economy.

And here, for the repo market, the FSB now wants to impose a minimum .05 percent haircut for corporate debt securities with maturity of less than a year – and a 4 percent haircut on longer term securities. Why the discrimination? In general terms of stability, what is wrong with long term debt?